Midcap, smallcap stocks tumble as investors exercise caution; Nifty SmallCap 100 index slips 4%

Stock market today: Shares in midcap and smallcap segments took a heavy beating on Tuesday (September 12), a day after Kotak Institutional Equities said in its report that the relentless rally in mid-and small-cap stocks is nothing but irrational exuberance. The Nifty Small Cap 100 index declined 4.10 per cent to settle at 12,450.20, while the Nifty Midcap 100 index slipped over 3 per cent to end at 40,170.30. 

The brokerage said, "We do not see many fundamental reasons for the meteoric rise in the stock prices of many mid-cap and small-cap stocks in the past few months. The fundamentals of most sectors have not changed much. However, market sentiment is quite exuberant, based on the following:

(1) steep increase in the prices of many mid-cap and small-cap stocks;
(2) large inflows into mid-cap and small-cap mutual funds; and
(3) huge number of new retail participants in the mid-cap and small-cap funds."

The strong performance of the mid-cap and small-cap indices has possibly pushed up return expectations among retail investors, the brokerage said in its report dated September 11.

The brokerage has also dropped the recommended mid-cap portfolio since it could not find too many stocks beyond the BFSI space that offer decent potential upside to their 12-month fair value.

Most of the non-BFSI stocks are trading above their 12-month fair values. "The valuations of stocks in our favourite capital goods, healthcare, QSR, and real estate sectors discount growth for the next few years and leave absolutely no room for any disappointment," it added.

"We would have had to remove these stocks from the portfolio anyway, as it would have been incorrect to recommend stocks with low conviction and potential downside to our fair values, which would have left a portfolio comprising BFSI stocks largely. Many of the stocks have jumped in the past few months (some within weeks of inclusion in the portfolio). We have changed the portfolio frequently in the past few months to keep up with rampant stock prices, but we have largely run out of options now. It is obvious that we have not developed some special stock-picking skills recently. In our view, the steep increase in stock prices simply reflects the irrational exuberance of investors in the mid-cap and small-cap parts of the market," the brokerage added.